Tuesday, February 06, 2007 | During a radio debate Saturday, mayoral candidate Donna Frye, who sits on the City Council, quickly digressed from an explanation of her plan to solve San Diego’s fiscal predicament.

“It is not a sound-byte plan,” Frye said.

Indeed, if anything became clear this weekend it was that Frye and her rival, former police Chief Jerry Sanders, will not be able to easily explain their proposed solutions for a financial crisis that even paid professionals have struggled to fully describe in dense volumes of text over the last two years.

With Frye’s unveiling of her own recovery strategy on Friday, both candidates have now given notice that they will approach the biggest issue of them all — the shortfall in the city’s pension system that some now estimate is greater than $1.7 billion — in remarkably distinct ways.

Frye has indicated that she intends to erase the deficit with aggressive and hostile tactics and an unprecedented appeal to San Diego voters for assistance. If backroom deals helped create the mess, she said, maybe getting the public into a seat at the table will make sure it never happens again.

Sanders said he would not impede efforts to legally obliterate large chunks of the debt but that he will focus in the near term on methodically paying it off. He would take advantage of borrowing opportunities, the city’s vast real estate assets and, he said, he would be able to “lead” the city’s employee unions and City Council as opposed to only confronting them.

Critics call Frye’s plan “irresponsible.” Others say Sanders’ is “foolish.”

Voters have 43 days to decide for themselves.

Wipe away debt or pay it off?

Frye says her proposal gives voters the most say in how the city gets there.

In fact — only a year after Frye bitterly opposed the effort to turn San Diego into a “strong mayor” form of government — highest on her list of proposals this year is to make the office of the mayor even stronger.

If she is elected, Frye pledges to ask voters to give her the authority to unilaterally take the city into bankruptcy if she deems it necessary. Right now, such a move would require five votes of the City Council.

Frye says she needs the leverage that power would bring to compel the city’s employee union leaders to renegotiate their members’ benefits.

“My good friend Jerry believes that the unions are going to come back to the table to negotiate voluntarily. I’m here to tell you they are not,” Frye said during the radio debate broadcast by KURS AM 1040 Saturday.

With the new power, Frye would also negotiate a level of benefits “the city can afford to pay” not just for future employees, but for current employees as well. The city has routinely assumed that only future employees could be affected by changes to the level of pension benefits without cooperation from employee unions.

More importantly to some was Frye’s declaration Friday that, if elected, she would demand that the city comptroller immediately cease paying pension benefits that City Attorney Mike Aguirre has deemed illegal. If the auditor were to somehow refuse, she’d have the power to find one who wouldn’t.

“Donna Frye has correctly concluded that there’s no easy way out. The financial condition needs to be restated downward,” said friend and advisor Pat Shea, who as an attorney helped lead Orange County through bankruptcy proceedings a decade ago.

Frye’s new determination to utilize and enhance the tools of a strong mayor was an interesting development to at least one of Frye’s previous allies in the fight to stop the reform.

Mel Shapiro, a City Hall observer, personally gave $20,000 to support the campaign he led to stop the “boss-mayor” initiative last year. He said Saturday that he still plans to vote for Frye.

“But I haven’t strayed from my feeling that I don’t like a lot of power concentrated in one place,” Shapiro said.

Frye’s proposal to immediately stop payment on the benefits the city attorney says are illegal came as a startling announcement to some.

“It’s irresponsible, immoral and probably illegal,” said Mike Conger, a lawyer who has successfully litigated claims against the city’s pension system.

Conger said that workers are paid for the work they provide. Sometimes that payment is deferred into future years — that’s the essence of a pension. To unilaterally cut it off is unjustified and unfair, he said.

“The workers went to work every day based on the promise that they were being compensated at a certain level. You can try to take that compensation away, but the employees can’t take those days that they worked back,” Conger said.

But Conger himself has filed legal actions meant to roll back pension benefits that he claimed were illegal because the board of administration facilitated them while many of its members had conflicts of interest.

Conger now says that the purpose of that suit, filed on behalf of the San Diego County Taxpayers Association — and then withdrawn a few months ago — would have been to restructure the agreement under new city rules that would require the benefits to be paid off within five years.

Sanders, for his part, said Frye’s abrupt change to the employees’ compensation would invite litigation. And it would distract the city from its goal of determining whether the pension benefits enacted in 1996 and 2002 were illegal, he said.

“It would put us in court for the rest our natural lives. The issue would switch from being about the legality of the benefits to the legality of the process she chose to take them away,” Sanders said in an interview.

His own preferred process is a bit more passive.

‘Hidden Taxes’ or Responsible Finances?

And the latter group also holds that even if the city could pay off its pension debt, the public would have never agreed to enhance employee pensions had it known it would have to sell land or pony up other assets to pay for them.

Hence Frye’s suggestion that the city immediately stop payment on pension enhancements allegedly granted illegally in 1996 and 2002.

It’s an idea her opponent clearly doesn’t share. But does he believe those benefits should ever be rolled back?

Sanders has said he supports taking the issue to the courts and he highlights the effect on the pension system’s shortfall that a successful legal challenge to the 1996 and 2002 benefit deals would cause, but he’s not banking on it.

“We need to get this pension system in the courts to determine if the benefits are legal or illegal and if they’re illegally granted we need to rescind them. That’ll save about $700 million,” Sanders said while listing his own proposed solutions to the fiscal problem.

City Attorney Mike Aguirre contends that pension benefit increases city employees secured in 1996 and 2002 are illegal. Aguirre claims that because the city failed to identify a funding source to pay for those enhanced benefits — and, in fact, effectively cut funding to the pension system — the labor contracts are illegal and invalid. He also argues that the board of administration of the San Diego City Employees’ Retirement System effectively facilitated the 1996 and 2002 arrangements even while a majority of its members faced an identifiable conflict of interest.

District Attorney Bonnie Dumanis has charged six members of the pension board with felonies for that very reason.

While Sanders’ plan includes supporting Aguirre’s efforts in his list of solutions, the candidate said in an interview that the experts with whom he’s consulted have not given him confidence rolling back the benefits is a realistic possibility.

And furthermore, his campaign Web site says that even if a court rolls back the benefits, a new “framework” would have been created for “minimizing dislocations for employees and retirees.”

So, Sanders said, there’s a gap in the pension fund that will remain regardless of what the courts do and he’s committed to addressing it by forcing the employee unions to the table and by issuing pension obligation bonds.

The extent of Sanders’ support for pension obligation bonds isn’t entirely clear either, however.

If the city is able to someday re-enter the bond market, it could sell pension obligation bonds. The city would receive one-time monies to invest in the pension fund, but it would have to pay the loans back for up to 30 years. The county of San Diego, for instance, has nearly $1.27 billion in outstanding debt on pension obligation bonds that it will be paying off until 2023.

In the radio debate, a similar approach for the city, Frye said, would be like levying a “hidden tax” that would “put our children into debt.”

“If you have debt service on a bond, that’s money you don’t have in the general fund to spend on other city services,” she said.

But Sanders countered that the city’s labor unions had already agreed to give up some future benefits that will save $17 million in annual savings — money that could consequently pay the annual service on pension obligation bonds.

That money, however, would only translate into a $100 million one-time payment to the pension fund and Sanders supports a plan that calls for $600 million of immediate investment into the retirement system. He said he hopes to explore options like mortgaging some of the city’s property but most of the $600 million pension investment would come from pension obligation bonds.

Frye’s advisor, Shea, said the difference between Frye and Sanders on pension obligation bonds highlights what could be a “big bright line in the sand” between the two. Frye’s strategy, he said, is better for taxpayers.

“All the other approaches just throw assets sequentially on to the fire in hopes that they will have some effect, but not knowing whether they will,” Shea said. “With that approach, there is never a reason for any of the unions to negotiate. They will just lobby for more stuff to be thrown in.”

Sanders, in an interview, backed off the push for pension obligation bonds, saying the Pension Reform Committee’s recommendation last year for $600 million-worth may not be as good as it was before.

“We might need to find a completely different solution because nobody’s addressed this issue in a year,” Sanders said.

Going forward

Sanders has put forward a list of slight adjustments to the pension system that could have a large impact on how fast the deficit is expected to grow.

He hopes to increase the age of retirement and change the way an employees’ pension benefit is calculated — forcing employees to collect a percentage of the average of their three highest paid years rather than just the year of their highest salary.

Sanders said he hasn’t ruled out the possibility that future city employees will be part of a so-called “defined-contribution” pension plan, similar to a 401k, which allows the employer and the employee to contribute to a retirement fund but the employee is not guaranteed a certain pension. And he said he will be able to persuade the employee unions to freeze their salaries for several years. Some employees are already under a contract that freezes their salary for two years.

The threat of bankruptcy, Sanders said, will force the unions to discuss these possibilities.

“I have said from day one that I will use the threat of Chapter 9 and that the unions will respond,” Sanders said.

Frye said Sanders is relying heavily on borrowing money to improve the appearance of the pension fund.

“Call it what you want, my opponent is going to get us further into debt and that is part of his solution,” she said.

And his threat of bankruptcy wouldn’t be as effective as hers, Frye said. Without asking the voters for more authority, the City Council would have to sign off on bankruptcy proceedings and Frye said nobody trusts them to do it or to do it responsibly.

If the public voted to give her the power to take the city into bankruptcy unilaterally, Frye said, she’d be in a better position to compel the unions to talk.

And what would they talk about?

Frye said she would “adjust the benefits for existing employees to levels the city can afford to pay.”  She would calculate that level by first setting a cap on the percentage of city funds that can go to the pension system — and the resulting reform package would require voter approval, Frye said in the debate.

Sanders said the proposal lacked specifics.

“We’re not hearing a plan here, we’re hearing ‘Now, if you elect me, I’ll have a plan in front of you by January or June or November,’” Sanders said in the debate.

He also attacked Frye for suggesting that tax increases may someday fit into her plan.

“I literally can’t imagine why we would be penalizing taxpayers for the poor decisions of this council,” Sanders said in an interview.

Frye said it would be “insulting” to the voters to completely write-off tax increases in the future.

Sanders might actually agree with that statement. In his own “increasing revenues” plan detailed on his campaign Web site as of Sunday, he levels a charge:

“Given the magnitude of the city’s financial problems, any candidate who tells voters he’s taking options off the table; such as no new taxes or fees or no consideration of bankruptcy under any circumstances, is insulting the intelligence of his or her constituents,” it reads.

Political consultant-turned writer Scott Barnett offered a cynical way to view the divergent pension-reform proposals.

“Neither candidate’s No. 1 priority right now is to solve the city’s problem. They’re No. 1 goal is to get elected and these are strategies their campaign consultants think will best help them win,” Barnett said.

E-mail Scott Lewis at

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